AOC and 529 qualified expenses not calculated correctly in TurboTax Desktop (2021)

[alsn]

Here are the expenses:

Tuition 16,695

Room and Board (Rent) 9,925

529 withdrawal 20,000

AOC should use 4,000 out of Tuition expenses and

529 should use remaining expenses i.e. 12,695 out of tuition + 9,925 for rent i.e. 21,920 which exceeds 529 withdrawal with no tax due on withdrawal.

However, TurboTax desktop is saying that some of the withdrawal is taxable. For some reason, I think, it is using 10,000 out of tuition for AOC (instead of 4,000).

Any idea?

[AmyC · Accepted solution]

Let's work backwards. You want $4,000 of AOTC.

This leaves $12, 695 tuition plus room and board of $9925 which is greater than $20,000. You are not required to enter the 529 information at all since all of it goes to qualified expenses.

See page 52 for qualified distributions at IRS Publication 970, Tax Benefits for Education.  

Please see my 529 example with IRS information here.

[Hal_Al]

I agree with AmyC, delete the  1099-Q, since you have sufficient expenses, even after claiming the AOC. 

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. 

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

That said, TurboTax using $10,000 instead of $4000, for the credit,  has been a common problem.  To edit it, Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.  You may reach that screen sooner.

Another issue: you say "Room and Board (Rent) 9,925".

529 distributions can be used for off campus living.  But the amount is limited to the lesser of actual cost or the school's "allowance for cost of attendance" (essentially what on campus students pay). 

[alsn]

So, should I respond No to this question? If I respond Yes, it will create the form. Or, should I let it create it and then delete it?

[Hal_Al]

Respond no, to keep it simple.